Argentina's Currency Black Market Expands

BUENOS AIRES, Argentina – Along a busy street in the Argentine capital, a man in the brown suit doesn't need to speak above a whisper to sell his goods: "Money change. Money change." Those who want to swap pesos for dollars follow him through a run-down mall to a lingerie store. There, amid bras and pantyhose, he closes deals for greenbacks.

Argentines have increasingly turned to such black market money changers since President Cristina Fernández sharply restricted purchases of dollars in banks and exchange houses to try to keep hard currency from pouring out of the country.

Argentina has been kept from global capital markets since defaulting on its debt during a financial crisis a decade ago, so Fernández's government wants to keep dollars in the country to replenish central bank reserves and pay government debts. Argentines, meanwhile, are haunted by nightmares of the crisis, when banks froze deposits and the currency lost value. So they are eager for dollars to stash in vaults or under their mattress. Others send them abroad for safekeeping.

Many economists say the new black market spawned by currency controls could choke back Argentina's economic growth and create even more inflation: Controls make it harder for people to do business and undermine confidence in the peso, causing it to devalue even more quickly. That can create the threat of shortages when people are unwilling to sell goods for a currency they do not trust. The curbs could also encourage Argentines to withdraw dollars from banks.

"The government controls toughened this week and will get tougher," said Aldo Abram, director of the Fundación Libertad y Progreso consulting firm. "Argentines know this doesn't end well. The more they try to control it, the more Argentines will want to get dollars, even at a loss and this can lead to panic. ... It might look like people want more dollars but the reality is that they want to get rid of pesos. They're scared about what can happen to the country."

Under the controls imposed shortly after Fernández won re-election in October, the country's tax agency, known as the AFIP, must approve all purchases of dollars. The formal exchange rate was 4.47 pesos per dollar on Friday, a slide of about 8.6 percent from where the peso was a year ago.

But employees at currency exchange houses in downtown Buenos Aires say approvals have become more difficult recently, and only about one in 10 Argentines is now getting tax agency authorization to buy dollars. Many have turned to so-called "exchange caves," where the free market price, known as the blue rate, tops 5.50 pesos to the dollar, 23 percent more than the official rate. The spread between the two markets has widened sharply since the government controls began.

"The tap closed last week without any official statement and we don't know when it will be opened again," a trader told the AP in anonymity, fearing reprisals because he also trades in the black market. "The more Argentines are kept from getting dollars, the worse they'll get. They get desperate and they look for dollars wherever and whatever it takes. It's impossible to predict where the blue price will reach to if this goes on."

Just days after Fernández won an easy re-election in October, she began extending the government's reach in the economy with capital controls, import caps and more recently, the takeover of YPF, Argentina's largest energy firm. Fernández has accused unnamed business groups of encouraging a run on banks to hurt her second mandate.

The currency controls, which some say are similar to those of Venezuela, have worked to discourage capital flight, but analysts say they spook investors and hurt the economy.

"These measures are creating more uncertainty, "said Daniel Kerner, an analyst for the Eurasia Group consultancy. "People turn to the dollar in Argentina because (the country) has a high inflation rate and high instability."

High inflation, which private analysts calculate at about 25 percent annually, leads Argentines to seek shelter in real estate or the dollar.

"Today's society is saving in dollars and leaving the economic circuit because of distrust," said former Economy Minister Roberto Lavagna. "To stop this, the government had this idea; it's a police-like vision ... and we'll see the results in a little while."

Lavagna said if the government continues the currency controls, they will hurt Argentines, especially middle- and lower-income families. "Recovering from (the uncertainty) might take two or three years. And that's just to go back to the starting point," he said.

Argentines say the currency controls have made buying dollars practically impossible. The policies also restrict how many greenbacks people can withdraw from their Argentine accounts via ATM machines when they travel abroad, as well as tougher border controls searching for currency leaving the country. Argentina's Central Bank and the AFIP declined to comment for this story.

In theory, companies and individuals can buy up to $2 million each month in U.S. currency. The buyer must present a sworn statement for every $30,000 dollars purchased to show where the money came from. But in practice, getting dollars, even with the paperwork, is becoming harder every day, frustrating people such as retirees who want to safeguard their pensions in dollars and families who want to buy a home or simply pay off dollar debts.

After being turned away from a bank, Elsa Centeno, a retired 70-year-old teacher, said that the AFIP didn't authorize her to receive $2,000. "I can't understand why the AFIP is going after me and not those who take out millions out of the country. It's offensive," she said on her way to buy dollars on the black market.

Fernandez argues that fear about the impact of controls is being spread by her opponents, and she has asked Argentines to remain calm and trust the strategy without falling prey to rumors.

"Don't believe anything they say. This Argentina, especially under this president, is absolutely responsible and predictable," Fernández said recently. "Just forget about it. Nothing weird is going to happen to the dollar."

Hundreds of AFIP tax agents patrol the financial district in Buenos Aires trying to crack down on black-market traders. As the curbs stiffened this week, the AFIP said it had seized $23,000 from the glove compartment of a car owned by an Argentine who was coming back from the Uruguayan border city of Paysandu. Agents also found almost $95,000 and 800 Euros stashed inside a backpack found at the Paraguayan border. Argentine customs says about $3.8 million were held in the second semester of 2011.

The real estate market, where sales are transacted in dollars, has been hit by the currency controls, economists say. Property deals dropped by as much as 13 percent in the first four months of 2012 compared with the same period last year even though the government says the overall economy expanded by roughly 9 percent. Just in Buenos Aires, construction permits have plunged 35 percent, according to data by the Argentine Real Estate Chamber.

"Construction is one of the most dynamic activities of the economy, so I hope this can be reverted," said chamber resident Nestor Walenten. "It depends on the government. The warning signs tell us it should modify this policy. "